UNITED STATES SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 15743 / May 18, 1998 SECURITIES AND EXCHANGE COMMISSION v. THE OAKFORD CORPORATION, EDWARD J. MUEGER, INC., R.M. CARUCCI CORP., TOUCHDOWN SECURITIES, INC., MFS SECURITIES CORP., OAKWOOD SECURITIES CORP., D ALESSIO SECURITIES, INC., WILLIAM S. KILLEEN, THOMAS W. BOCK, THOMAS J. CAVALLINO, EDWARD J. MUEGER, ROBERT J. CARUCCI, CHRISTINE A. BEYER, MICHAEL A. FRAYLER, MARK R. SAVARESE, JOHN J. SAVARESE and JOHN R. D ALESSIO, United States District Court for the Southern District of New York, 98 Civ. 1366 (JSR) (S.D.N.Y.) The Securities and Exchange Commission today filed an amended complaint in its federal civil enforcement action against five of the eight New York Stock Exchange ( NYSE ) floor brokers originally charged on February 25, 1998 with illegal trading on the floor of the NYSE. The amended complaint adds charges of trading ahead of customer orders in violation of the antifraud provisions against Thomas J. Cavallino ( Cavallino ), Robert J. Carucci ( Carucci ), Christine A. Beyer ( Beyer ), Michael A. Frayler ( Frayler ), John J. Savarese ( J. Savarese ), and their firms, R.M. Carucci, Inc., Touchdown Securities, Inc., MFS Securities Corp. and Oakwood Securities Corp. The amended complaint also adds charges that each of these five defendants, and Mark R. Savarese ( M. Savarese ), traded into their customers orders in violation of a NYSE rule. The amended complaint charges that Cavallino, Carucci, Beyer, Frayler, J. Savarese, R.M. Carucci, Inc., Touchdown Securities, Inc., MFS Securities Corp. and Oakwood Securities Corp., engaged in a pattern of initiating and executing transactions for their own accounts while holding unexecuted customer orders for the same securities, often receiving a better price for themselves than they obtained for their customers. The amended complaint also charges that these defendants and M. Savarese, a floor broker who was charged in the original complaint, filled customer orders by purchasing stock from, or selling stock to, their customers from their Oakford accounts in violation of a NYSE rule. As set forth in the amended complaint, floor brokers owe a duty to their customers to act in the customers best interest. A floor broker breaches this duty when he executes his own trade before the customer's trade. By executing his own trade first, the floor broker runs the risk that the price obtained for the customer's order may not be as favorable as it would have been had the customer's order been executed first. Moreover, a large customer order to buy or sell a security will often result in an increase or decrease, respectively, in the price of that security following execution of the order. With this knowledge, a floor broker could receive a large customer order and, before executing the customer order, purchase or sell shares of the same security for his own account, thereby benefiting from the price movement that follows execution of the customer's order. This practice is commonly known as frontrunning. Floor brokers are also prohibited from filling a customer order by purchasing securities from, or selling securities to, that customer from the floor broker's own account. ======END OF PAGE 1====== Such a practice would place the floor broker in the capacity of a principal, a position inconsistent with the duty owed by floor brokers as agents of their customers. These practices are prohibited by the federal securities laws and a variety of NYSE rules. The Commission s original complaint alleged that William S. Killeen ( Killeen ) and Thomas W. Bock ( Bock ), principals of the defendant Oakford Corporation ( Oakford ), entered into unlawful profit sharing arrangements with the defendant floor brokers. Pursuant to these arrangements, Bock and Killeen opened accounts at Oakford and falsely identified the accounts as Oakford proprietary trading accounts. These Oakford accounts were, in fact, controlled by the floor brokers. During the day, as they learned of potentially advantageous trading opportunities from their unique positions on the floor of the NYSE, the floor brokers initiated transactions in the Oakford accounts. The floor brokers and Bock and Killeen generally split the profits and losses in the Oakford accounts 70/30 - 70% to the floor brokers and 30% to Oakford. The federal securities laws and a variety of NYSE rules prohibit floor brokers from trading for their own account while they are on the floor of the exchange. The amended complaint does not add new charges against Killeen, Bock and Oakford, however, the original allegations remain pending and are incorporated in the amended complaint. Between October 1993 and December 1996, the Floor Brokers netted illegal profits totaling at least $11.1 million, with the floor brokers receiving approximately $8.8 million and Oakford receiving approximately $2.3 million. In order to conceal their scheme, the defendants deliberately falsified various books and records. The Commission s amended complaint adds charges that the five floor brokers noted above, and their firms, violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b- 5 thereunder, and NYSE Rule 92. The complaint also charges these floor brokers and Mark R. Savarese with violating NYSE Rule 91. The complaint further charges the defendants with violating, or aiding and abetting violations of, Sections 11(a) and 17(a) of the Securities Exchange Act of 1934 and Rules 11a-1, 17a-3 and 17a-5 thereunder and NYSE Rules 90(a), 95(a) and 111(a), as set forth in the amended complaint. The complaint seeks permanent injunctive relief, disgorgement of all illegal profits from the defendants, prejudgment interest and civil money penalties. ======END OF PAGE 2======